After Modigliani and Miller\'s (MM) original no-tax theory, they went on to deve
ID: 2719229 • Letter: A
Question
After Modigliani and Miller's (MM) original no-tax theory, they went on to develop another theory that included corporate taxes. Miller then developed a theory that included corporate and personal taxes.
A)
Complete the following sentence based on your understanding of the MM Model with corporate Taxes:
MM's Model that included corporate taxes concluded that ______ debt is the best way to capitalize a firm.
Choices for above fill-in-the-blank are: 100% or 0%
B)
Markum Co. has no debt, and its value is $600.0 million. Carter Co. is otherwise identical but levered with $240.0 million in debt. Under the different models, what is the value of Carter Co. if its corporate tax rate is 27%, the personal tax rate on equity is 12%, and the personal tax rate on debt is 29%?
Consider the following info:
Adding personal taxes to the model lowers, but does not eliminate, the benefit from corporate debt. In the US, taxes on capital gains are lower than on ordinary income and can be deferred. The effective rate on stock income is normally less than that on bond income, and although the personal tax on debt will lower the gain from corporate debt, it is not usually enough to eliminate it. Therefore, there is still a gain from leverage using Miller's model, as well as the MM model of corporate tax.
Is the preceding information correct?
Yes or no?
MM w/o taxes 600.00, or 762.0, or 563.8 or 664.8 MM w/ corporate taxes 536.0 or 664.8, or 622.8, or 762.0 Miller with corporate and personal taxes 622.8 or, 817.2, or 664.8, or 762.0?Explanation / Answer
After Modigliani and Miller's (MM) original no-tax theory, they went on to develop another theory that included corporate taxes. Miller then developed a theory that included corporate and personal taxes.
A) MM's Model that included corporate taxes concluded that 100% debt is the best way to capitalize a firm.
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